Retail

How Online Sales Tax Impacts Different eCommerce Models

How Online Sales Tax Impacts eCommerce Models

Since 1992, when eCommerce was still in its infancy, online retailers have not had to collect sales tax. That all changed last year with the Wayfair vs. South Dakota ruling that sought to level the playing field for brick-and-mortar stores.

States can now tax sales by companies that do not have a physical presence within the state.

Navigating these laws is easier said than done. One state might tax a product that another excludes from levies, for example, and not all states offer the same small business tax exemptions.

More than 230 million U.S. consumers are expected to be shopping online by 2021. Will this increasingly regulated online sales tax environment affect this growth? The latest Next-Gen Sales Tax Tracker explores the complexities and challenges of compliance for different business models.

Online Sales Tax and Marketplaces

Little is straightforward. Many are also pushing to make marketplace facilitators such as Etsy and eBay collect and remit sales tax for transactions on their online platforms.

More than 30 states have implemented “marketplace facilitator” provisions requiring tax collection for platforms enabling third-party vendors to sell products.

Marketplaces generate a large amount of revenue. In fact, the 75 largest online retail marketplaces in the world were responsible for nearly half of all global eCommerce sales in 2017.

Walmart.com is currently undergoing a legal dispute with a Louisiana parish because it didn’t report or remit the sales tax for sales made by third-party retailers through its online marketplace.

In an interview with PYMNTS, Avalara President and COO Amit Mathradas talked about the impact tax laws are having on marketplaces. “Marketplaces like Amazon, Etsy, eBay and Walmart offer sellers incredible reach and exposure, but they can complicate sales tax collection and remittance because of the patchwork of marketplace facilitator legislation,” he said.

Mathradas characterized this challenge as a data management issue. Sellers need to track which items are sold through which channel and to which state.

Online Sales Tax and SMBs

A recent survey of U.S. SMB owners found that 20 percent report being “very concerned” about the Wayfair decision, and 29 percent were unaware of it. A majority (53 percent) thought that managing sales taxes for their businesses was either “somewhat” or “not at all” clear. 

Kansas stands out for recently passing an economic nexus law that does not include any exemptions for small businesses. This is in opposition to the policy established in the 2018 South Dakota v. Wayfair case, which included a levy exemption for SMBs with in-state economic activities that fall below 200 transactions or $100,000 worth of local sales.

Small to mid-sized businesses (SMBs) in most states are struggling to understand and manage their tax obligations under jurisdictions’ differing policies. Even merchants that are exempt from paying taxes are often obligated to meet certain reporting requirements regarding their customers’ purchases. That’s why many SMBs are turning to tax software to help.

According to a survey by Capterra, nearly 54 percent of SMBs planned to invest in finance and accounting software within the next two years. SMB retailers in particular specified plans to spend approximately $30,000 to $40,000 on such investments.

Online Sales Tax and Global Merchants

PYMNTS spoke to Ted Hettich, chief sales officer at U.K.-headquartered online shopping marketplace Fruugo, about the complexities of online sales tax in the U.S. and globally. The company connects approximately 1,000 retailers to customers in 46 countries and currently supports U.S.-based merchants looking to sell abroad, with vendors prepared to incur their destination countries’ sales taxes.

However, Fruugo does not yet support sales in the U.S. that would surpass any thresholds for being exempted from economic nexus taxes. “All these different nexus laws coming into play in each state have kept us from doing that [expansion],” Hettich said. “The U.S. is very complex, even on the municipal level – cities like Santa Monica, California, … [tax shoppers based on] individual zip codes.”

Intricate tax policies are affecting merchants’ and marketplaces’ decisions about where and what to sell. “We do have some retailers who are conscious of the thresholds and, consequently, want to restrict customers’ abilities to purchase certain items in certain countries, and we allow that,” noted Hettich.

Tax and accounting solution providers are the most obvious recipients of business opportunities created by the complexities of compliance. But U.S. businesses could also benefit by helping foreign merchants enter the market and navigate economic nexus regulations.

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